Employee ownership has emerged as a viable method of creating asset-building opportunities – an economic priority in light of the wealth disparity in the United States. Studies of worker-owned companies have shown that they provide more stable and resilient jobs for its employees, create wealth in the community it is a part of, deliver higher wages and benefits, and mitigate structural inefficiencies in the enterprise. Fostering models that encourage and provide pathways for employee ownership may be a central campaign for creating a more equitable society.
Employee ownership generally occurs through an employee stock ownership plan (ESOP) or in the form of worker-owned cooperatives. However, there are fewer than 400 worker-owned cooperatives in the country, and the incubation of new worker cooperatives and ESOPs have several barriers relating to information gaps, entrepreneur incentives, collateral limitations, and capital access.
Conversions of existing businesses to employee ownership via an ESOP transaction are easier than starting a new one, and still result in distributed ownership on a potentially larger scale, depending on the company. The strategy of assisting enterprises convert to worker ownership is popular among many advocates for this reason.
There is a great opportunity for such conversions: a staggering number of healthy, successful businesses are about to undergo a succession process, with baby-boomer owners gearing up for retirement – a generation that owns 2.34 million businesses. While some transitioning businesses may be shut down, sold to competitors, relocated, or taken over by private equity funds, some retiring owners may prefer a situation in which the company – and, relevantly, its employees – continue to thrive. This provides a great opportunity for worker ownership and subsequent asset-building for the workers of these enterprises.
The strategy of exiting to employees is still relatively uncommon, though growing, with New Belgium Brewery and Real Pickles providing inspiring examples. So why don't we see more of them? Among the factors that hold back a succession via conversion are the financial terms, the availability of financing, and the real or perceived difficulty and time-consuming nature of a conversion. As a corollary, there are few vehicles equipped with the technical and cultural tools to facilitate a conversion process.
The barriers to conversion to worker ownership could be mitigated by designing an intermediate actor – a private equity-like acquirer who can buy the company from the exiting owners and shepherd it to worker ownership. Such a model could help preserve the jobs and the place-based benefits of businesses rooted in community. It would also provide current owners a way of exiting while continuing a legacy of economic impact in their communities, and the mission of enterprises with stated impact.
We are currently exploring what such a vehicle could look like by asking:
What kinds of businesses (by size, industry, geography, etc.) are better positioned for conversion? More willing to do so?
What would the upside look like for workers and for investors (monetary gains from productivity boosts, tax advantages, higher retention, etc.), and where would the risks lie?
What fundamental constraints and limitations are there on such a vehicle?
How can it avoid over-leveraging the business at exit and put the well-being of the workers at its center?
Who are the actors, from investors to technical assistance providers to business owners, that could play a role in bringing this blueprint to life?
While there have been conversion success stories well documented by DAWI and Project Equity, we believe there has not been an intermediary equity vehicle specifically aimed at facilitating conversions in a succession context. This project will require innovative financial modeling as well as technical knowledge and assistance for a new conversion mechanism. As an experimental model, it could provide new avenues for PRI and MRI strategies, popularize conversion as an exit strategy for retiring baby boomers, and foster the ultimate goal of asset-building for the workers and their communities.
How you can help
This project is collaborative and seeks to draw from experienced practitioners across a range of relevant fields. If you have technical experience in working with worker-owned businesses, are involved in private equity deals involving ESOPs or cooperatives, or research the worker ownership field, we would love to hear from you and get your input on various aspects of our ongoing project. You can reach out to us at email@example.com.